The Government’s 2018 Budget statement
30 October 2018
The task facing the Chancellor at yesterday’s Budget statement was a daunting one: he needed to maintain stable public finances while finding the cash to pay for the Government's spending commitments on the NHS, fix holes in Universal Credit funding, and live up to the Prime Minister’s announcement that the UK had reached the "end of austerity". Added to this mix is the UK’s looming exit from the EU – and the fact that a deal is yet to be signed.
However, the Chancellor struck a confident tone and emphasised that the Budget did indeed mark a turning point for the public finances, announcing a raft of public spending measures.
The biggest announcement in the Budget for the insolvency and restructuring profession was the news that HMRC is to become a secondary preferential creditor, from 2020, for taxes held by companies on behalf of employees and customers (so, income tax, NICs, and VAT, rather than corporation tax) - a consultation will be carried out before the changes are introduced. The Budget also included a further consultation on a 60 day Breathing Space policy for indebted individuals - slightly longer than the six weeks proposed in the Government's original call for evidence last year. Please see our press comment on the HMRC announcement here
, and a brief overview of the changes below.
With Budget statements normally taking place on a Wednesday, yesterday's was the first on a Monday since 1962, and was timed to avoid Halloween-themed headlines. The initial press reaction appears to be positive, but time will tell whether the Budget was a trick or a treat for the country.
HMRC: a secondary preferential creditor from 2020
The headline announcement for the insolvency profession this year was that, from 2020, HMRC will become a secondary preferential creditor for taxes held on behalf of employees and customers taxpayers (VAT, PAYE Income Tax, employee NICs, and Construction Industry Scheme deductions). This is obviously a major policy change for HMRC and one which R3 has said could potentially be a retrograde and damaging step to UK plc if the plans are not thought through carefully. The move will be a tax on creditors, including small businesses, pension funds, suppliers, and lenders, and reverses a status quo that has been encouraging business rescue since 2002.
R3 has already spoken to HMRC to outline our initial views, and we will be engaging with them further in advance of a technical consultation on this proposed measure being published later this year. We will be providing members with a further separate update on this matter in the coming weeks, but the Treasury’s Budget briefing, which sets out more detail on their thinking, can be found here
Further to HMRC’s ‘tax abuse and insolvency’ consultation earlier this year, the Budget also set out that, “following Royal Assent of the Finance Bill 2019-20, directors and other persons involved in tax avoidance, evasion or phoenixism will be jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency.”
In our response to this consultation, we said the case for action is untested with risks of unintended consequences should HMRC seek to tackle this perceived problem. We also stressed that HMRC should first test and prove there is a compelling reason and loss of tax to justify the considerable risks to the UK insolvency framework’s role in supporting the UK economy.
The Budget gave no indication that any empirical evidence has been gathered to justify the policy, and we will be engaging with HMRC to ensure that they carefully consider the potential impact of this measure.
Breathing Space: a further consultation
The Government also announced a full consultation on its plans for a 60-day Breathing Space for indebted individuals. This is longer than the six weeks proposed in the Government's call for evidence last year. R3 supported the six-week proposal as striking an appropriate balance between the interests of creditors and debtors. We will be engaging members to determine whether this longer Breathing Space maintains a suitable balance.
Ministers have listened to R3's other recommendations on the policy, particularly on the need to have eligibility criteria to ensure that the scheme is not abused. The Government has proposed that an individual would have to: access debt advice, be assessed as being in problem debt by a debt adviser and, not have been in a Breathing Space in the previous 12 months, a key recommendation in our call for evidence response.
The consultation also sets out more detail about the Government’s plan to introduce a statutory debt repayment plan alongside the Breathing Space. While there is a clear-cut case for the introduction of a Breathing Space scheme, there is less evidence to support the introduction of a statutory debt repayment plan within England, Wales and Northern Ireland. However, the Government has listened to R3’s call for the two procedures to be considered as separate and distinct measures. R3 will be responding to the consultation in full, which can be found here
, in due course.
Please do let us know your views on the Budget, or if you have any queries about the Chancellor’s announcements.